In an effort to crack down on predatory payday lending, New York Governor Andrew Cuomo’s (D) administration sent cease and desist orders to 35 online companies offering illegal payday loans to New York consumers, some charging exorbitant interest rates as high as 1,095 percent.
“Illegal payday lenders swoop in and prey on struggling families when they’re at their most vulnerable — hitting them with sky-high interest rates and hidden fees,” Cuomo said. “We’ll continue to do everything we can to stamp out these pernicious loans that hurt New York consumers.”
Payday loans remain a national problem even as 15 states plus Washington D.C. have banned high interest loans.
What is payday lending?
What exactly are payday loans? They are usually short-term advances for customers who live paycheck-to-paycheck. Companies that are usually not affiliated with a major bank give borrowers a small value advance against their next paycheck, usually just a few hundred dollars. Ideally, the borrower should have enough money to repay his loan once he gets paid from his employer. The problem is that a small loan can quickly turn into a nightmare for a borrower who is hit 100, 200, even 1,000 percent interest on the original loan.
The Legislative Gazette reports that this can be complicated when customers are often duped into believing they are paying down the principal when they are actually just paying minimum interest and finance charges.
New York has already banned payday lending, but the ongoing operations moved the governor’s office to act this week, announcing in a press release that Benjamin M. Lawsky, Superintendent of Financial Services, had sent cease and desist letters to 117 banks – as well as NACHA, The Electronic Payments Association, which administers the Automated Clearing House (“ACH”) network.
“Companies that abuse New York consumers should know that they can’t simply hide from the law in cyberspace. We’re going to use every tool in our tool-belt to eradicate these illegal payday loans that trap families in destructive cycles of debt,” Superintendent Lawsky said.
The NACHA board includes representatives from a number of those banks. Cuomo has requested that they work with DFS to cut off access to New York customer accounts for illegal payday lenders.
In New York, the current laws stipulate that companies are forbidden from offering loans with an interest rate exceeding 16 percent for loans under $250,000. The law also prohibits loans with interest rates of more than 25 percent per year for loans upward of $250,000, according to Lawsky’s letter.
This announcement may help to curb the worst abuses of payday lending, but the proliferation of online companies offering quick loans is a problem that allows these companies to collect large sums from New Yorkers and individuals across the U.S.
WIVB reports that “Sally” (a pseudonym), saw a flyer in the mail claiming that she could get an immediate cash loan. Because she was in tough financial straits, she borrowed $500 in what soon became a nightmare for the New York state resident.
“Sometime they call me 10 or 15 times a day,” Sally said. “I don’t recall exactly the interest rate, but it was three digits. Like 600 or 700 percent, something like that.”
Every two weeks, the company would withdraw $200 from Sally’s account, which only paid of some interest, not the actual loan itself.
“I was getting more than half of my paycheck taken out every other week, which put me behind even more in bills, which caused me to take out another payday loan, and another one,” Sally said.
Sally was able to stop payment after she learned that the pay day loans were already illegal in New York state. It’s become an all too common story for the average payday borrower, who is indebted for more than half a year.
Laws are already in place across many states, but have become difficult to enforce, according to reports by advocacy groups. The Center for Responsible Lending (CRL), “a nonprofit, nonpartisan organization that works to protect homeownership and family wealth by fighting predatory lending practices,” reports that 15 states plus the District of Columbia have already restricted loan rates, banning triple-digit interest. Two states — Ohio and Arizona — banned payday loans altogether in ballot measures last Nov.
Congress has not passed legislation on this issue other than implementing a law that protects military families with a 36 percent APR cap on small loans.
The problem is that recent reports show that states that have banned or limited predatory payday loans still see companies skirting the laws.
Propublica reports that in Ohio, a state that banned payday loans in 2008, “hundreds of payday loan stores still operate charging annual rates that can approach 700 percent.” This is accomplished usually in one of two ways. Companies either exploit loopholes in existing laws, or they create other high interest products that are not covered by the legislation.
Federal agencies are poorly equipped to handle the task although the newly formed Consumer Financial Protection Bureau can address “unfair, deceptive or abusive practices” by financial institutions.
Lack of banking options
What’s the solution? Some advocacy groups say that the best way to put out the payday lending fire is to eliminate the conditions that force low income Americans to take them in the first place, namely through raising the minimum wage.
Congress is gridlocked on that point, but formal banks also have a role to play in offering banking services to those currently without the means to obtain a bank account.
Roughly one in four, or 28.3 percent of all U.S. households conduct some or all of their financial transactions outside of the mainstream banking system according to a recent report by Forbes. These people constitute the “underbanked” or “unbanked” populations without access to formal banking services.
Those who seek “alternative financial services,” namely pay day loans, prepaid debit cards, check cashing services, non-bank money loans and pawn brokers report that “AFS transaction products are more convenient and feel AFS credit products are easier to obtain than credit products at banks.”
Chase, Wells Fargo and other big banks are beginning to resemble the payday lending institutions, charging fees for debit cards, banking and checking accounts that make it difficult if not impossible for this segment of the population to afford to use formal financial services.